Shareholders make their presence known in takeover battles

With a foot of snow blanketing New York City, Michael Schafler realized just how fundamental a recent shift in the role of shareholders has become.

The litigation partner at Fraser Milner Casgrain LLP was speaking at a conference on shareholder activism in the city in January. The massive snowstorm wasn’t enough to keep attendees away.

“The theme was clear: Shareholders are becoming more and more engaged,” he says. “Shareholder activism has really become a buzzword in the industry.”

In Canada, investors are increasingly flexing their muscles to gain board control and to shut down transactions they don’t care for.

Consider shareholders of HudBay Minerals Inc., who halted a proposed acquisition of Lundin Mining Corp. in 2008 over objections to issuing the 153 million shares that would be needed to fund the buy.

In February, Gregory Boland, chief executive of West Face Capital Inc., which owns 11.4% of the stock in Maple Leaf Foods Inc., secured a seat on the board after threatening a proxy battle.

The Ontario Securities Commission may have okayed the 2010 deal that gave the Stronach family the equivalent of about $1-billion to give up ownership of their multiple voting shares in Magna International Inc. But in reasons released early this year, the OSC was critical of the special committee process em-ployed in the transaction, suggesting directors must pay more attention to shareholder concerns in the future.

William Braithwaite, a partner at Stikeman Elliott LLP who practises primarily in mergers and acquisitions and corporate finance, says it doesn’t even have to get to the point reached in the HudBay/Lundin situation for issuing companies to take note of shareholder concerns.

“Just knocking on the door with the ability to take steps often leads to a negotiation and ultimately the shareholder getting at least a part of what he was looking for,” Mr. Braithwaite says.

“The changes have been completely fundamental,” says Carol Hansell, corporate finance and securities partner at Davies Ward Phillips & Vineberg LLP, who was recently appointed to the board of the International Corporate Governance Network.

“If you measure it over the last 10 years, shareholders have become more organized, they’re better informed, they understand the power that they have.”

Ms. Hansell notes that the institutional investor community in Canada is adept at co-ordinating their views on issues of corporate governance.

“There are a number of changes that have taken place in Canadian governance at the insistence of institutional shareholders that didn’t require regulation,” she says, pointing to the typical separation of the roles of chair and CEO and the fact that as a general rule, directors of Canadian companies don’t receive stock options.

Ms. Hansell says the Canadian Coalition for Good Governance, the umbrella organization that promotes best practices and regulatory reform, makes a point of engaging in dialogue with issuers.

“It’s not an adversarial kind of meeting. They want to come in and either express their own views or hear more about something they don’t understand very well based on the disclosure in the circular,” she says. “I think it’s constructive and positive, but that also didn’t exist 10 years ago, so issuers are just getting used to that. They’ve got their investors sitting right in front of them.”

Gordon Chambers, a securities law partner with Lawson Lundell LLP in Vancouver, works primarily for mining companies and says he’s seen a decided rise in shareholder actions by investors in the sector who become disillusioned with management teams failing to produce results.

If a company’s share price has fallen and an investor has a sufficiently large investment, he says, they are essentially trapped.

“They have to make a decision: Do we sell our position at fire-sale prices or do we agitate for change?” Mr. Chambers says, citing a straight exit, a corporate transaction or even management shakeups as possibilities.

“One of the few things they can do is start to threaten change at the board level. That tends to get the attention of the board’s directors when your shareholders are saying, ‘We’re not very happy with management and the board and stewardship of the company that they’re providing.'”

Activism like this in recent years is a shift from the past, when, he says, institutions were reluctant to become known for rocking the boat and lose out on future opportunities to invest.

“It’s a combination of things. It’s the circumstances of the market, the willingness of the institutional investor to exercise their rights as a shareholder more and the backdrop of what’s gone on in the last 20 years. We’ve gone from financial scandal, to crisis, to financial scandal in North America and I think attitudes have changed,” Mr. Chambers says.

FMC’s Mr. Schafler says volatility is part of the reason behind more active shareholders as any market uncertainty can represent an opportunity to make money. But reflecting on his time at the conference in New York earlier this year, he says there’s also an element of responsibility.

“It does seem that there are some activist shareholders who are doing this because they truly believe there are corporate governance issues at play that should be rectified,” he says. “I hadn’t appreciated that until I heard comments from the crowd that said. ‘Look, make no mistake, we’re investors, but the reason we’re doing this is to ameliorate something that we think is morally wrong.’ ”

Mr. Braithwaite of Stikeman Elliott agrees. He notes that the fact the Canada Pension Plan and Ontario Teachers’ Pension Plan were key players behind the Magna OSC action shows that large institutional shareholders are willing to dedicate resources to pursue what they see as worthy causes.

He cautions that it’s not pure goodwill, but, he says, “Often it’s possible that achieving an altruistic objective founded on good corporate governance principles may not achieve the best economic result in the short term, but I think they have a sense that in the long-term, it’s the right thing to do.”